Oracle learns the dark side of hardware

Oracle is finally learning that the hardware business is not the software business — traditionally known for its fat margins. Revenue for the company’s Sun Microsystems-rooted hardware business fell 14 percent in the fiscal second quarter, ended November 30, compared to the year-ago period.

This is bad news for the company which pinned its cloud hopes on specialized data center appliances — the Exadata database machine, Exalogic middleware/application appliance, Exalytics analytics engine as well as a proposed “Big Data Appliance.” This is the third consecutive quarter where Oracle posted hardware sales declines but this is probably more painful because the company is finally now fully engaged in its big data center appliance push.

Oracle co-president Safra Catz said businesses are delaying purchases until Oracle completes its transition to the new T4 processor. “Some customers moved to qualify the new servers and significantly slowed buying the older systems,” Catz said on the earnings call Tuesday night. She also said that big deals are taking longer to close and require higher-level sign off, sometimes at the CEO level. That’s been a trend for a while, and since the Oracle exa-boxes carry a high price tag — for the base level hardware-only, a quarter rack Exadata machine starts at $330,000 list. That sign-off mandate trend will affect Oracle more than it does commodity server makers.

Worse, the company said it expects hardware revenue to fall between 4 percent and 14 percent in the third quarter ending February 28, 2012. And the company, which had boasted of robust 54 percent gross margins on hardware in its first quarter, saw gross margins fall to 51 percent in the second quarter even as the number of machines sold fell. This all comes after Oracle hired 1,700 more sales people under the direction of co-president Mark Hurd, a noted hardware guy.

Looking at the bright side, Catz said the company saw a huge uptick — triple-digit growth — in Exadata and Exalogic orders for the quarter. But that was clearly not enough to offset the decline in sales of bread-and-butter servers.

Oracle’s not alone in this data center appliance race where it competes with IBM’s Netezza, EMC Greenplum and other offerings.

Oracle CEO Larry Ellison said he is pleased with those big-box sales. “The thing that really moves the needle are Exadata and Exalogic [that] have been out there for awhile…we sold 200 in Q2, we’ll sell 300 in Q3 and we’ll sell 400 in Q4.” The hardware business, “could turn around and show growth as soon as Q4,” Ellison told analysts on the earnings call.

There are some data center pros in large Oracle shops who love the idea of consolidating their workloads on fewer, optimized machines and dealing with one vendor on support and maintenance. But many others balk at paying the premium for such machines and chafe at the notion of vendor lock-in.

Wall Street was definitely spooked. At press time, Oracle shares were trading at $25.39 per share, off nearly 13 percent. Skeptics have long said that Oracle would not be able to sustain its high-margin hardware bubble forever. Ellison signaled after the acquisition of Sun Microsystems in January 2010 that the company would cede the low-end X86 server space to competitors like Dell, while it focused on high-margin, specialized machines. It was unclear from the get-go whether sales of those big machines could offset lost sales on the less glamorous commodity boxes, however.

Right now, it appears that the loss of that low-end business hurts more than Oracle expected.